Commodities fell the most in 18 months on speculation that China will increase borrowing costs to damp inflation, eroding demand for crops, metals and energy.

The Thomson Reuters/Jefferies CRB Index of 19 raw materials fell 3.6 percent, the most since April 20, 2009. Sugar fell by a record 12 percent in London and the most in 22 years in New York. Corn and soybeans in Chicago dropped by the exchange limit.
China is the world’s leading consumer of many commodities, and consumer prices in the country last month topped a two-year high. On Nov. 9, raw materials rose to a 25-month peak as gold surged to a record, while cotton and copper headed for all-time highs. Wheat and rice also slumped today, and the grain component in the CRB had the biggest drop at 5 percent.

“The risk of rising Chinese rates increases the chances for demand to slow,” said Dale Durchholz, the senior market analyst at AgriVisor LLC in Bloomington, Illinois. “The message is, China is taking a more aggressive stance to cool inflation and push speculative money out of commodities.”

The CRB index dropped 11.25 to settle at 303.6, with every component down. The gauge dropped 3.2 percent this week, snapping an 11-week rally. The measure is up 7.1 percent this year.

The People’s Bank of China boosted its benchmark one-year lending rate on Oct. 19 by a quarter of a percentage point to 5.56 percent, the first increase since 2007. The central bank may raise interest rates within weeks, a Bloomberg News survey of economists showed.

Weekend ‘Talk’

“There’s talk of an interest-rate hike over the weekend,” said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million. “It’s quite possible given how inflation has accelerated.”

Commodities in China including copper, zinc, cotton, sugar, rubber, corn and soybeans fell by the daily limits on concern that another rate increase and additional sales from reserves of raw materials would slash demand.

“Investors took profits after the recent rally in commodities,” said Judy Zhu, an analyst at Standard Chartered Bank in Shanghai. “The rumor that China may raise interest rates also contributed to the general panic selling.”

This week, commodity exchanges in the U.S. and Europe increased the cost of trading after rallies earlier this month in cotton, sugar and soybeans. ICE Futures U.S. boosted margins, or the amount of money traders must keep on deposit, by 81 percent to $5,460 per speculative sugar contract.

Raw-sugar futures in New York tumbled 12 percent, the most since July 1988. Yesterday, Europe announced plans to increase exports.

‘Risk Averse’

“The commodity market overall has turned bearish, and a lot of traders have become risk averse,” said Ricardo Scaff, a trader at Rabobank International in New York. “The European Union news is negative, and it has become expensive for some funds to hold positions with the jump in the margin requirements.”

Copper tumbled the most in four months in New York and fell from a record in London. China is the biggest consumer.

“China sent shivers through the market,” said Michael Gross, an analyst at OptionsSellers.com in Tampa, Florida. “Prices will continue to fall next week.”

Gold futures tumbled the most in four months to settle at $1,365.50 an ounce in New York. On Nov. 9, the price reached a record $1,424.30.

“From a technical perspective, it’s not over for gold,” said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois. “Gold just had a really bad day. If it goes under $1,315, then you can go on the promenade deck and wave the rally goodbye.”

Cotton futures fell 5 cents a pound, the most allowed by ICE. China is the world’s biggest consumer of the fiber.

‘Brake’ on Demand

“Raising rates has a negative psychological impact and will put a brake on the rising demand,” said Keith Brown, the president of Keith Brown & Co., a brokerage in Moultrie, Georgia.

On Nov. 10, cotton reached $1.5195, the highest level in 140 years of trading. The price has jumped 91 percent in the past 12 months as demand climbed in China, eroding inventories in the U.S., the biggest exporter.

Crude oil fell the most in more than three weeks. China is the world’s biggest energy-consuming country.

“Anything that provides evidence of a slowing Chinese economy is likely to be reflected in oil-demand estimates,” said Adam Sieminski, the chief energy economist at Deutsche Bank AG in Washington. “It would also tend to moderate bullish views for where oil prices will be in 2011.”